SNL recently spoke with the team about its expectations for real estate globally in 2010. What follows is an edited transcript of that conversation.

SNL: I wanted to start out with a 30,000-foot view of real estate in general. We've had two years of low transaction volumes, some rough patches. What do you see 2010 bringing? Will transaction volumes rise? Will anyone be able to grow rents this year? What is your general view?

Blondeau: We still see many risks in the commercial real estate space, mostly relating to accounting and legal issues, as there is growing pressure on the banking sector to show more transparency regarding their underlying real estate exposure and collateral. We think that the CMBS market is still a risk around the globe, but it's usually a U.S.- and North American-centric risk. In terms of where we see value today, we believe that the Asian market is still a good play for us versus the North American market and also versus the Euro zone and the U.K. In the U.K., we've seen stabilization in property values and rents, but we think at this point it's pretty much priced in, so we're staying on the sidelines with U.K. stocks right now.

Pépin: As far as transactions on the U.S. side are concerned, I don't think we are going to see as much distressed selling as people were expecting a year ago. It's no longer only about who is willing to sell but rather who is willing to buy. This means we're expecting to see good matches between sellers and buyers — transactions will not only be financial transactions, they are also going to be reputational transactions. I think Simon Property Group Inc. just showed us that at the end of last year by buying their outlets. This also confirms our expectations that the big players will probably get bigger and the best will probably get better. In terms of the lower market cap companies, I'm not expecting to see a lot of transactions, first because I'm not sure the fits will be there and secondly, they might not be able to pay what sellers are expecting.

Blanchard: On the emerging market side of things, we've seen some different characteristics from the developed markets over the last couple of years. If we look at the publicly traded companies, we saw their values go down but not so much because the value of the underlying real estate went down; it was more of a liquidity issue as investors were taking money out of these markets. So there's been very limited forced selling of physical property over the last couple of years. I think if we look at 2010 from a transaction basis, there's probably going to be limited transactions because there continues to be a lack of supply in these markets. So really what we're expecting to see is more development. I think another thing which is very positive that we continue to see in the emerging markets would be rental growth, which is very different from what we see in the rest of the world.

What do you see this year for the debt markets? Will they thaw out a little bit more? Will they remain tough? Will we only see debt available for certain top quality sponsors?

Felteau: We've seen a lot of recapitalization in the public sector, and that has caused REITs in general to be better-positioned than the private players in the cycle. What we're seeing now is that for those public companies that came to the market, banks are generally willing to extend loans quite easily. Globally, REITs are benefiting from that advantage compared to private players that have not been able to recapitalize. So we're starting to see more transactions globally, but mainly transactions involving REITs.

If we're talking about Asia, we just saw CapitaLand Ltd. in Singapore buying Orient Overseas for $2.2 billion in China, expanding its portfolio significantly. Large capitalization companies such as Westfield are already talking about starting new developments in Australia. So REITs and public companies are moving forward ahead of private players and becoming more aggressive on external growth.

Pépin: There's still a ways to go to at least bring some of the leverage down in the U.S. for public companies, so I'm expecting more secondary offerings before the debt market really opens up for the smaller players. I don't see any problems for the huge players out there to get some debt. Simon Property Group got some really, really great rates recently for a 30-year bond offering at 225 basis points, which is basically less than a 6% financing cost for 30 years. This is the kind of thing I'm expecting: Big players getting access to the market, being able to do stuff. I'm not sure it's going to happen for the smaller players, or at least the highly leveraged players, down the road.

Larsen: From a European point of view, what we're seeing now — spreads in the high 100s, maybe in the 200s for smaller companies, all-in costs at high 4s into the 5s but low 6s generally for most companies — is not too bad compared to cap rates, and tickets are definitely increasing in size right now. The loans are definitely there for the public companies.

Flageole: Lending has never really been a problem in China, especially last year. Even through the 2008 crisis, there were very limited problems with bank financing in the China and Hong Kong region. The debate is now more about when the government will limit the liquidity tap. We're now facing the potential scenario where loans will not be as widely available as they were in 2009. These loans might also show a greater cost for real estate investors and developers.

Talking about consolidation among listed companies around the world, if you see it at all, where do you think we'll see the most M&A-type activity taking place?

Pépin: Everybody knows about General Growth Properties Inc.; it's probably going to be the biggest thing to watch for right now. A deal, or no deal, will set a benchmark for other transactions going forward. That being said, I'm not sure we're going to see that much REIT-to-REIT activity, other than GGP. I expect to see more of the private names selling their assets and maybe some joint ventures being dismantled, such as happened with Kimco Realty Corp.buying back some joint venture partner. I see more of that coming than REIT-to-REIT transactions right now.

Felteau: In terms of consolidation, what we've seen in the last few years were REITs in general becoming more aggressive with international expansion and owning different platforms. Since the beginning of the crisis, and right now, we've seen companies coming back to basics and consolidating their strength in their own markets. So we expect to see companies selling portions of their platforms on the international space, where they are not particularly strong versus their local market competitors.

Two regions where there might be transactions are Australia and Japan. In Japan, there are about 44 J-REITs at the moment, and a lot of them are quite small. They have more difficulty refinancing and getting attractive rates compared to the larger ones. So this is definitely a place where we could see mergers and acquisitions, and we've already seen a few happen. The government is trying its best to help make the environment better and facilitate transactions.

Flageole: In China, I think it would be very healthy for the market to see consolidation among developers and homebuilders. However, what we are likely to see in 2010 are more IPOs and companies trying to get capital from the market, which at some point will probably create an oversupply of listed companies and homebuilders in China. In the longer term, there is going to be consolidation, but we don't see it happening in a significant way in 2010.

Blanchard: This is also similar to what we are expecting to see in the emerging markets in 2010. IPOs are something we are going to see this year in some of the markets. The other thing we're expecting to see, primarily in some of the southeast Asian markets, is the introduction of REIT legislation. As such, we expect to see some existing property companies spin assets off into a REIT-type structure, so it's actually the opposite of consolidation. We also continue to expect a fair bit of organic expansion, either expansion of existing space or greenfield development or redevelopment. Consolidation would be really quite tough at this point since the market is not flooded with too many names.

Felteau: One thing to note as we're talking about new IPOs coming is that what we saw last year was quite interesting. If you split the year in half from March to midsummer, we saw lots of growth coming out of the emerging markets, as well as China and Hong Kong. In the second half of the year, we actually saw the developed markets like Europe and North America outperform. The interesting phenomenon we observed is that as the developed markets went up, investors started to differentiate between companies by looking more at quality of assets and at what is really driving returns for these companies. In 2010, that is one thing we believe is going to be really important, to differentiate clearly between companies. Stock picking is going to be crucial in 2010. It won't be a market driven by momentum and growth, as was the case in the first half of last year.

So now let's go around to different areas and talk about which sectors within regions are stronger and will outperform and which you recommend staying away from.

Larsen: Generally speaking, for Europe we look at things more on a country basis than on a sector basis, given that a lot of the companies are diversified. However, what we're seeing as being a bit cheaper than the rest right now is some retail in continental Europe. Looking at our stock picks, that's really the only area that stands out as being a little bit more attractive. We've seen a bounce in U.K. values, and valuations have definitely incorporated that. So we're a little more cautious as to where the next leg of value will come from for the U.K.

Pépin: In the U.S., the market had a good run over the last six months, and REITs reacted strongly to good news on the economy. We feel valuation is around fair but there are opportunities out there. Multiresidential in the U.S. is a sector that got beaten up and where we see huge leverage to job growth. Furthermore, that sector bears lots of potential for transactions. Even though NOI is likely to go down this year, we feel it is a second-half story and that there is value in that sector. We feel comfortable with the office space. There was stabilization at the end of last year. Like during any cycle, there was too much firing in financial services and now they are starting to hire back. So we see some opportunity in the office space, mainly in the CBD versus suburban.

The other thing we are looking at is malls. We feel more comfortable with the malls versus strips because we feel fundamentals are better and the companies are on very solid ground. In terms of growth, where we really see potential is in the specialties. There is not a lot of supply and there is demand for the product, including data centers and labs.

Blanchard: What we're really focusing on in the emerging markets side is the theme of domestic consumption. The domestic consumer continues to remain very strong and continues to drive growth in these markets. There are two sectors we are focusing on closely. One is the retail, in particular mall companies. In all of the countries where we have access to retail, we continue to see attractive opportunities and good valuations. I think with the growth we are expecting and the increase in NOIs, we think that the companies are still conservatively valued. The other sector we are focusing on is on the homebuilder side, in particular, residential developers that target the mass market and the affordable housing sector.

Flageole: We see bright spots in Hong Kong. There is very limited supply in the grade A office sector for the next few years. Rents are starting to move upward in Hong Kong, so this is a sector where there is probably good news to come for landlords. Still in Hong Kong, high-end residential is starting to look expensive. There has been an increase in prices of about 30% last year and affordability could become a problem. We would avoid being overexposed to that specific subsector. Commercial property in China had a tough year in 2009. Retail is certainly looking better this year. There has been positive net leasing of space recently, and the rise of the consumer in China is still a long-term story. China office still looks a bit weak, especially in Beijing and Shanghai, mostly on oversupply concerns.

Finally in Singapore, mass market residential looks a bit expensive. There was a big shift up in the second half of last year. Retail looks better. There is a lot of supply in that sector but the momentum should be quite positive in 2010 as the two integrated resorts that will open this year should attract tourists.

Felteau: Last year was very tough for Japan, being an export country. The yen was also at a record level. The positives came really late in the year. But now we're getting more and more positive news out of this country. We started to see major J-REITs come to the market, and we also started seeing transactions in terms of the best assets in Tokyo. We believe the well-located assets and the companies owning them, which are the major developers and major J-REITs, are going to do quite well this year versus last year, when they really underperformed.

In Australia, the economic situation was really good. There was only one quarter when the GDP was negative. We're still seeing the job numbers coming out really positive. In terms of a sector call, we're really bullish on the office sector in Australia. There is not a lot of supply, especially in Sydney and Melbourne. We also think the residential sector is still well positioned. There is population growth in Australia, and this is different from other markets, especially the developed markets. We're expecting those two sectors to do well this year.

Ok, well that's all I had. Fred, any closing comments?

Blondeau: In terms of expected returns for 2010, we see a total return of about 12% to 15% globally, including emerging markets. We see North America returning about 5% to 10%. In Europe, expect an average 8% to 10%. The bulk of our expected return is really in Asia and emerging markets, where we see 20% to 25% upside return at this point. In terms of our bets, we are overweight in Asia still this year, where we still see relative value versus Europe and North America. Within Asia, the bulk of our bet is in Hong Kong.

As you've heard, the market has clearly rebounded. It's going to be a stock-picking market, and we think that the U.S. is a little bit more at risk in terms of macro because its fiscal position is not ideal. The U.S. and the U.K. are still going to pay for the economic stimulus. We think that growth down the road will be mitigated. We understand that we're in line with the consensus. Asia and the emerging markets are where we can pick stocks that will help us beat our indices. We clearly understand the risks there. We see the Chinese government being really active and trying to stop the stock market going up, but we think that should be mitigated by positive secular trends in economic parameters in China and Hong Kong.

We could be surprised by the U.S.: currency is clearly a risk there, but we still think it is worth it at this point. This is what we are focusing our efforts on in terms of risk management. We don't want to miss anything in the U.S.